Financial rules of thumb can be inaccurate
because people’s lives differ. But they can
help us make difficult decisions or give us
benchmarks. Here are a few:
- Rule of 10:
- For perspective on big purchases,
think about how you will feel about it in 10
days, 10 weeks, and 10 years. For a luxury
car: In 10 days, I’ll still be excited about
the new-car smell and its nice ride. In 10
weeks, it’s just the machine I use to get to
work and the supermarket. In 10 years, I’ll
barely remember this car.
- House payment:
- Your mortgage, including
taxes and insurance, should not exceed 29
percent of your gross monthly income.
- Car payment:
- All vehicle payments should
not exceed 15 percent of your take-home pay.
- Total debt:
- Total monthly debt payments
should not exceed 36 percent of your gross
- Car repair:
- If the auto repair costs less than
half of the trade-in value, repair it. Otherwise,
consider selling it and buying another.
- Holiday gifts:
- Spend no more than 1.5 percent
of your gross income on the holidays,
including gifts and travel.
- Save 10 percent of your take-home
pay. Some would say that should be on top
of retirement savings.
- Kids’ allowance:
- Give $1 weekly per grade
in school. A fourth-grader gets $4.
- Life insurance (comment from Mark):
life provides a better value than whole life
for disciplined savers.
- Restaurant tipping:
- To quickly figure a
generous tip on a bill over $20, double the
first digit on your bill. For bills more than
$100, double the first two digits.
- Emergency fund:
- Keep a rainy-day fund
equal to three to six months of expenses.
- Debt payment:
- Pay debts from highest
interest rate to lowest… or from the smallest
amount to largest.
- Mutual funds:
- Be wary of funds with an
expense ratio of more than 1 percent.
- College borrowing:
- Don’t borrow more
money than you’ll make in your first year
working after graduation.
- Asset allocation:
- That’s how you should split
your long-term investing between stocks
and bonds. A conservative rule of thumb is
100 minus your age goes in stocks; the rest
in bonds. More aggressive is a stock allocation
of 110 minus your age.
- Organic produce:
- If it has a thin skin that you
eat, such as apples, spend extra for organic.
If it has a thick skin that’s discarded—say,
bananas—save your money. It’s about
exterior pesticide residue.
- Choose experiences:
- In a choice between
spending on things or experiences with
other people, choose the latter. Research
shows it makes us happier.
- Carry a credit card balance.
- Lend money to friends and family.
- Borrow from your 401(k) or cash out early.
- Pay fees on a checking account.
- Buy an extended warranty.
- Buy an investment you don’t understand.
Copyright © 2010 Zola Levitt Ministries, Inc., a non-profit
501(c)(3) organization. All rights reserved. Brief passages may be quoted
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